Spec building ahead for top-tier industrial market?

Dwindling inventory levels of large top-quality industrial space might prompt regional developers to begin speculative construction of industrial warehouse properties, a segment of the construction industry that’s been stalled for five years.

Several million square feet of new industrial space came online in Greater Reno-Sparks in 2008 and 2009, flooding the industrial market with an over-abundance of space just as the recession began taking down businesses across the region. Nearly five years later, much of that space is leased.

At the start of the second quarter, there was just one industrial space in the region that could accommodate a 400,000-square-foot tenant, says Dave Schuster, senior vice president with the industrial group at Avison Young. The building on Moya Boulevard in Stead formerly housed Ryder Logistics. Another building in Tahoe Reno Industrial Center could accommodate a tenant with similar space requirements, Schuster says.

The tightening market for Class A industrial space could lead to new speculative construction within the next 12 months — and possibly lead to lost deals if brokers have no product to show, says Mike Hoeck, senior vice president with the industrial properties group at commercial brokerage NAI Alliance. However, high overall vacancy rates in the industrial sector and low lease rates still make new spec construction a gamble at best.

But Nevada is a place where risk-takers have been known to roll the dice.

“As far as someone coming out of the ground, he who is boldest may win,” Hoeck says. “Whoever has the best land basis and a key site might benefit real well from having the only standing large building. It’s kind of like sitting at a poker table and wondering who will push their chips all in.”

Site location for a spec property is key, Hoeck says. Tahoe Reno Industrial, with its seemingly infinite supply of land, its proximity to Interstate 80, and the ease of getting building plans permitted in Storey County, could see the next new tilt-up. Stead, where potential tenants could benefit from surrounding residential and retail rooftops, is another prime location.

An overall vacancy rate of around 13 percent in the industrial market still plagues the hope of new development, though. Schuster says a healthy market has a vacancy rate of about 8 percent. Lease rates below 30 cents per square foot — deals are still being done at 26 to 27 cents per square foot on average — also could continue to stall new tilt-up construction. Once lease rates stabilize in favor of landlords at north of 30 cents, Hoeck says, building owners can further strengthen their position by shaving concessions such as free rent.

Area residents may note that there’s an abundance of vacant industrial space in Sparks, South Meadows, Stead and other submarkets. However, most of that space doesn’t fit the requirements of distribution companies looking to locate operations in northern Nevada. Class A buildings — there are only 35 in the region, Schuster says — have 28-foot or higher clear heights and can be front-loaded or cross-docked. The clear height is the main component, he adds, because distribution companies require the extra height to increase their racking space per square foot of floor space.

There are 15 vacant buildings in the Class A and Class B categories that are 158,000 square feet or larger and have at least 22-foot clear heights, and there are 14 spaces available that are 150,000 square feet or greater with at least 24-foot clear heights, Schuster adds.

Schuster says the region has gotten some attention the past few weeks from users looking at leasing a large top-tier building, but even if a tenant takes the large building in Stead he doesn’t feel developers will jump into the fray this year. Developers have long held spade-ready plans for buildings ranging in size from 500,000 to 1 million square feet and can get them moving in short order, but many are still hesitant to begin construction after the troubles of the past five years.

“Developers got burned, and money is hard,” Schuster says, “but everybody has got some ready-to-go plans.”

Other companies looking at moving operations to northern Nevada simply require a new building to meet their needs, such as NOW Foods and Urban Outfitters, both of which were built by United Construction.

United Construction’s specialty for decades was building large tilt-up warehouses, but the company began diversifying and seeking work in other states following the construction downturn. Mike Russell, chief operating officer of United Construction, says there’s been a definite uptick in development opportunities in northern Nevada, but the majority of those proposals are build-to-suit buildings.

However, Russell says, developers could begin speculative construction within the next six to 12 month as market conditions continue to improve.

“We are almost there, and that’s a lot better than would I have guessed last year,” Russell says.

Spec industrial development depends on three things, he says: Vacancy below 10 percent, positive net absorption in the industrial market, and increasing rents.

“Those are the three legs of the economic piece of puzzle developers look for,” Russell says.

The pending sale by Prologis of its northern Nevada holdings — 9 million square feet — also could positively impact development opportunities, Russell notes. Prologis bought the portfolio in 2007, and as market conditions eroded many five-year leases were inked at low lease rates. Those leases are coming due, and the new owner of the portfolio most likely will seek rent increases that will positively impact industrial rents across the board, Russell says.

“Now that the markets is more normalized, we should see some rent growth.”